Wednesday, March 14, 2012

The Eurozone is not yet out of the woods, since the fundamental problem of bloated government spending has not been fixed, but liquidity conditions in the Eurozone financial markets continue to improve, as the chart above attests. Without liquidity, financial markets become frozen and can't carry out their role as a shock absorber for the real economy. Liquid markets, however, can deal with seemingly intractable problems, and that is a necessary condition for a long-term solution to Eurozone problems. So far, so good.

Unemployment in Greece is at 22% (and are still increasing). Home values in Spain declined 11.2% during 4th qtr 2011 alone (and are still plummeting). Reams of other data clearly indicate that the southern flank of Europe is in economic depression. To overlook these indicators via affirmation of improvements in "liquidity" represents a callous indifference to the facts-at-large. The proper reporting is that southern Europe is in a sharp economic decline, and that the decline dramatically increases the risks of political instability in Europe. Anyone who is not terrified for the political future of Europe should revisit the hisotry. Yes, economic stability seems to revolve around bond yields and liquidity, however political stability is placed at risk when one takes a myopic view of economics as somehow detached from politics (which is exactly how central bankers tend to think).

PS: The only good news is that political instability tends to drive down equity prices, which spells opportunity for those with cash to invest.

At this point I can't decide if Achuthan is being stupid, stubborn, or both.

If you had told him after he made his recession call in late September that most, if not all, of the major US economic indicators would be BETTER 5-6 months hence, he probably would have said something like, "That's simply not going to happen. The data is clearly showing a deterioration which can only get worse."

Well, guess what? 5-6 months later, that which he believed was impossible at the time has become not only possible, but a reality. At some point he's just going to have to face the reality that his leading indicators do not function as effective leading indicators anymore.